'The government is putting insurance in the same category as food, which is essential for life.'
'Now this is an opportunity for the sector to focus on the consumer.'
In his first public conversation after taking charge as chairman of the Insurance Regulatory and Development Authority of India (Irdai), Ajay Seth speaks to Tamal Bandopadhyay about the impact of reforms in GST, foreign direct investment in insurance, the Bima Sugam initiative, and flexibility in investment norms for insurance companies.
What are your expectations from the industry on GST cuts being passed on to customers?
As a regulator, and with this being my first appearance, I would like to state that I have an open mind.
Based on data, analysis, and the perspective I have, I reach conclusions.
But nothing is done without consultation, discussion, and a consensus.
I draw strength from what Parliament has mandated -- protect policyholders' interests and, on the other side of the coin, regulate, promote, and develop insurance in an orderly manner.
Orderly development requires building a consensus on any reform.
On GST, what the government has signalled is that insurance firms have zero GST, and so do food products (processed).
The inference I draw here is that the government is putting insurance in the same category as food, which is essential for life.
Now this is an opportunity for the sector to focus on the consumer. Are we content with serving 10 per cent of our population? No.
This is a moment where the government has provided maximum possible support.
From the regulator's side, the question is how we can economise our cost. We have to go from a high-cost structure to a moderate-cost structure, with good service.
In life insurance, 20 per cent of the risk pool is the cost of procuring it and managing it. And that too, a significant part of that risk pool is not really the risk pool.
It has a lot of savings too. Think of any financial sector that has a cost of savings and the risk pool is 20 per cent. For non-life it is 30 per cent.
Commissions to corporate agents vary hugely. The largest life insurer after Life Insurance Corporation spends 4 per cent of its premiums on them, while the second-largest spends 17 per cent despite both getting 50 per cent of their business from this channel.
So, GST rationalisation is a great opportunity for the industry to make products more affordable, efficient, and attractive to consumers because unless they see value, the sector cannot grow.
The industry has gone through multiple shocks in the past few years in the form of tax, change in policies related to expense ratios, surrender charges besides the pandemic.
Can it expect some stability now?
The sector, especially health insurance, is at an unstable equilibrium at the moment. On the life side, there is a low-efficiency equilibrium.
But other sectors that manage savings of Indians are giving competition to life insurance companies.
So, is the status quo the answer?
If you want to live with a low-level equilibrium or an unstable equilibrium, then it is so.
But does it require shocks?
No. It requires an orderly transition to a better tomorrow.
There is a lot of improvement that has to be done on the use of capital by insurance companies. The matter that requires the highest attention is distribution.
When can we expect 100 per cent FDI in the insurance sector?
Legislative changes for 100 per cent FDI will come in due course. But this alone cannot take care of the capital needs of the sector.
The industry's own capital is about Rs 3.5 trillion. FDI is welcome. All those who have come in are welcome, and they have contributed.
But the significant part is domestic capital. Of the Rs 3.5 trillion, FDI is only Rs 80,000 crore to Rs 90,000 crore.
And all is not on the balance sheet of the insurance companies. Some of it has gone to pay previous shareholders.
Is the regulator looking to tweak investment norms so that long-term insurance funds flows into infrastructure?
Currently, an infrastructure project must have an AAA or AA rating to attract insurance funds.
Of the assets under management of Rs 75 trillion with the insurance sector, only Rs 7.5 trillion is in infrastructure. But are the regulations coming in the way?
The answer is "no". The regulations say insurance companies can invest at least 50 per cent in government securities, and the rest can be in corporate bonds and non-fixed income securities.
It is a question of whether both pull and push factors have to work. Today, the industry is looking for good quality paper.
A fair amount of work is needed in terms of the pull factor. As the insurance regulator, it is my job to work closely with the chairman of the Securities and Exchange Board of India and governor of the Reserve Bank of India on how we create conditions for a more mature bond market.
And here the role of credit rating agencies becomes important.
For example, if an item is rated 'A' and there is a deterioration in the quality of the paper, the issue is how quickly the industry gets to know about it and whether there will be a market to make an exit ... so this is the pull factor that is required.
In insurance, a conversation is needed as to what kind of push can be generated. A regulator cannot say one can invest in a particular product.
It is when the consumer says that with a similar kind of risk profile, somebody else can give me X+delta (risk-sensitivity measure), why can you (the insurer) not provide it? So, this push is needed.
If any guardrails are needed on getting into an area that is less safe, we are ready to look at them.
How has been the progress of Bima Sugam -- the UPI moment for the insurance sector -- in the Bima Trinity?
The big piece next to distribution reform is digital public infrastructure. And we have not really made a beginning on that.
As the regulator, we see Bima Sugam as an entity that is consumer-facing, and at the back end are the insurance companies.
We have made a beginning. The products and services should be coming to the market in the next few quarters.
When is the insurance industry transitioning to risk-based supervision, the International Financial Reporting Standards (IFRS), and a risk-based capital framework?
Moving towards IFRS or IndAS (Indian Accounting Standards) is something we should do in about a year. It may not be 100 per cent.
But the idea is to bring significant pieces around that and then provide a glide path to others, which may require time to reach there.
Everybody will not be ready. Bigger companies will be while smaller ones may take some time.
IndAS is one of the enablers of the composite licence. This is a prerequisite. Without transparency on the balance sheet and the P&L (profit and loss) account one cannot get into composite insurance.
The second piece of risk-based capital will flow from this. Risk-based capital will help a few companies but will be a challenge for others.
So there we have to think about how to provide a glide path or give them a longer period to reach there.
But the journey has to begin. The third piece -- risk-based supervision -- is one on which we have to spend time and I would like to have a conversation on this with the sector.
Risk-based supervision needs solid corporate governance.
Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.
Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.
Feature Presentation: Aslam Hunani/Rediff